Fund and Asset Manager Rating Group

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1 Presale Report PE CFOs / Singapore Inside This Report Transaction Overview...1 Key Rating Factors...1 Structure Overview...3 Portfolio Overview...3 Structural Protections and Security...7 Cash Flow Scenario Analysis...13 Ratings Sensitivity to Account Investments...16 The Manager...17 The Fund Administrator and Transaction Administrator...18 Security and Bankruptcy Remoteness...20 The Model...20 Surveillance of the Transaction...21 Rating Sensitivity...21 Appendix A: Terms of the Bonds...22 Capital Structure Class Expected Rating Amount (Mil.) Currency Final Maturity Approx.% of NAV Approx. NAV OC (%) A-1 Asf 242 SGD June A-2 Asf 210 USD June B BBBsf 110 USD June Source: Fitch Ratings Fitch Ratings expects to rate the Class A-1, Class A-2, and Class B bonds issued by Astrea IV Pte. Ltd. (Astrea IV) as displayed in the table above. Expected ratings do not reflect final ratings and are based on information provided by the issuer as of May 23, These expected ratings are contingent on information and final documents conforming to information already received. Ratings are not a recommendation to buy, sell or hold any security. The offering circular and other materials should be reviewed prior to any purchase. Transaction Overview Astrea IV is a collateralized fund obligation transaction sponsored by Astrea Capital IV Pte. Ltd. (Astrea Capital) backed by interests in a diversified pool of 36 private equity funds, with approximately USD1.1 billion net asset value (NAV) of funded commitments and USD168 million of unfunded capital commitments. The underlying funds will distribute cash as they exit investments and will make capital calls when they require additional cash to invest. Cash flows generated by the funds will be used to pay off the bonds, as well as interest and other expenses. Key Rating Factors Related Criteria Closed-End Funds and Market Value Structures Rating Criteria (July 2017) Structured Finance and Covered Bonds Counterparty Rating Criteria (May 2017) Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (May 2017) Analysts Fund and Asset Manager Greg Fayvilevich gregory.fayvilevich@fitchratings.com Igor Gorovits, CFA igor.gorovits@fitchratings.com NAV Overcollateralization (OC): The rated bonds will make up approximately 45% of the NAV at issuance, providing a sufficient level of OC at the indicated rating levels as per Fitch s rating criteria. The OC provides the bonds with a cushion in case private equity distributions are realized at lower levels than expected. Loan-to-value (LTV) tests will trap cash to cap leverage at a constant threshold during the transaction s life. Structural Protection: Key structural protections include a Capital Call Facility to fund capital calls in the event of a cash shortfall, a Liquidity Facility to bridge liquidity gaps to cover interest and expenses, a reserve account for the Class A-1 and Class A-2 bonds, currency hedges to pay interest and principal of Class A-1 in Singapore dollars and hedge euro exposure, and long final maturities on the bonds to allow the structure time to weather a down market Diversified Portfolio: Astrea IV s portfolio of private equity interests is well diversified, which mitigates the market cyclicality and idiosyncratic factors that drive private equity fund performance. The portfolio comprises 36 funds of various vintages, managed by 27 general partners (GP), with 596 underlying investments across different sectors and regions. Brian Knudsen brian.knudsen@fitchratings.com Ralph Aurora ralph.aurora@fitchratings.com Alastair Sewell, CFA alastair.sewell@fitchratings.com This presale report reflects information at the time that Fitch s Expected Ratings are issued and as of the date of this report. Investors should be aware that the transaction has yet to be finalized and changes could occur. Investors should refer to Fitch s related Rating Action Commentary issued at transaction closing for final ratings. Final ratings include an assessment of any material information that may have changed subsequent to the publication of the presale. 23

2 Ability to Withstand Stress: Fitch measured the ability of the structure to withstand weak performance in its underlying funds in combination with adverse market cycles. The Class A-1 and Class A-2 bonds are expected to be rated Asf, in line with their ability to withstand fourth quartile level performance in the underlying funds, and the Class B bonds are expected to be rated BBBsf, in line with their ability to withstand third quartile level performance in the underlying funds. Under Fitch s projections the Class A bonds can be paid off before their maturity date in all stress scenarios Fitch ran applying the fourth quartile stress, and the class B bonds can be paid off before their maturity date in all stress scenarios Fitch ran applying the third quartile stress. Counterparty Exposure: Certain structural features of the transaction involve significant reliance on counterparties, such as the capital call facility provider, liquidity facility provider, bank account providers and hedge counterparties, and the rating on the bonds could be negatively affected in the event of a key counterparty downgrade. Fitch believes this risk is mitigated by counterparty replacement provisions in the transaction documents that align with Fitch s criteria. Ratings Linked to Reserve Investments: The funds in the Reserves Accounts will be invested in eligible securities or bank deposits, as specified in transaction documentation. As these investments can have long-dated maturities and will have a material impact on the performance of the rated bonds, the ratings of the Astrea IV bonds will be capped at and linked to the ratings of investments in the Reserves Accounts. At launch, these investments will be rated higher than the expected ratings of the senior bonds, and will not affect the bond ratings. Capabilities of the Manager: The manager (Azalea Investment Management Pte. Ltd., an indirect subsidiary of Temasek) has the capability and resources required to manage this transaction. While Azalea has a short track record as an independent entity, Azalea s management team has extensive experience and institutional knowledge in the private equity industry, and it draws on and benefits from its connection with Temasek. Alignment of Interests: The sponsor s (Astrea Capital, which is owned by Azalea and ultimately Temasek) and bondholders interests are strongly aligned, as the sponsor is expected to hold the entire equity stake (approximately 55% of NAV) in Astrea IV. In addition, the sponsor s motivation for launching the transaction has a non-financial aspect, as Azalea wishes to contribute to the development of investment products in Singapore based on private equity funds. Astrea IV is the fourth in a series of similar transactions launched by the sponsor and its affiliates, with the previous transactions launched in 2006, 2014 and Related Research Private Equity CFOs Restart Post-Crisis (A Niche Asset Class Emerges from Dormancy) (April 2017) 2

3 Structure Overview The issuer will be Astrea IV Pte Ltd., a special purpose entity that will be sole shareholder of two asset-owning companies (AOCs). The issuer s capitalization will also include Class A-1, Class A-2, and Class B bonds. The net cash received by the issuer via the issuance of the bonds will be used by the AOCs to repay a certain portion of existing loans from the sponsor, Astrea Capital, which were incurred in connection with the AOCs acquisition of the fund investments. Astrea Capital will be the sole shareholder of the issuer at launch. The AOCs will hold the fund investments as limited partners (LPs) for each of the underlying interests. They will transfer cash distributions from the fund investments to the issuer, who will apply the distributions semi-annually in accordance with the Priority of Payments. No additional funds are permitted to be purchased and funds may only be sold under certain restrictions as described below, ensuring the portfolio is fixed through the course of the transaction. AsterFour Assets I Pte. Ltd. will hold 22 fund investments and AsterFour Assets II Pte. Ltd. will hold 14 fund investments. The structure of the AOCs and allocations of specific private equity funds to each AOC are for tax reporting purposes. Structure Diagram Azalea Investment Management Pte. Ltd. (Manager) Sanne (Singapore) Pte. Ltd. (Transaction Administrator) Sanne (Singapore) Pte. Ltd. (Fund Administrator) Management Agreement Astrea Capital IV Pte. Ltd. (Sponsor) 100% (Issuer) Liquidity Facility Agreement Capital Call Facility Agreement Hedge Agreements Class A-1, A-2, and B Bonds DBS Bank Ltd. (Liquidity Facility Provider) DBS Bank Ltd. (Capital Call Facility Provider) DBS Bank Ltd., The Hongkong and Shanghai Banking Corporation Ltd. (Hedge Counterparties) Bondholders (Class A-1, A-2, and B Bonds) Management Agreement AsterFour Assets I Asset Owning Company I 100% 100% AsterFour Assets II Asset Owning Company II Trust Deed DBS Trustee Ltd. (Bonds Trustee) Perpetual (Asia) Ltd. (Security Trustee) Source: Fitch Ratings, Transaction documents Portfolio Overview The portfolio is well diversified across a number of metrics, which will mitigate some of the risk from the uncertain nature of private equity cash flows. Accordingly, Fitch has not applied haircuts to the portfolio for concentration risk in its rating analysis. Funds with a buyout strategy comprise 86% of the portfolio, funds with a growth equity strategy comprise 12%, with the remaining exposure in a private debt fund. The buyout emphasis mitigates the risk of uncertain cash flow distributions, as buyout mandates are typically invested in mature companies compared with growth equity investments, which typically involve companies that are profitable, but still maturing. 3

4 Geographically, the portfolio is U.S.-centric, with US-based funds accounting for 63% of the NAV while the remaining exposure is in Asia and Europe. Many of the 27 GPs are large and established, but a number manage less money or have a shorter track record than the more established ones. However, the risk of GPs with a shorter track record or more limited resources is mitigated by their limited exposure in the portfolio. The portfolio is diversified by GP, with the three largest representing 11%, 8%, and 7% of the portfolio. 4

5 Astrea IV Portfolio Undrawn capital commitments (USD) No. Funds Vintage Geography Strategy Commitment (USD) NAV (USD) % of NAV Total exposure (USD) 1 A8 - B (Feeder) L.P Europe Buyout Apollo Overseas Partners (Delaware 892) VI, L.P U.S. Buyout Apollo Overseas Partners VIII, L.P U.S. Buyout Bain Capital Fund XI, L.P U.S. Buyout Blackstone Capital Partners V L.P. and BCP % of total exposure 2006 U.S. Buyout V-S L.P. 6 Blackstone Capital Partners VI, L.P U.S. Buyout Carlyle Partners VI, L.P U.S. Buyout Clayton, Dubilier & Rice Fund IX, L.P U.S. Buyout Crestview Partners (TE), L.P U.S. Buyout Crestview Partners II, L.P U.S. Buyout CVC Capital Partners VI (B) L.P Europe Buyout DBAG Fund VI (Guernsey) L.P Europe Buyout EQT Mid Market (No.1) Feeder Limited 2013 Europe Buyout Partnership 14 Hahn & Company I L.P Asia Buyout Industri Kapital 2007 Limited Partnership IV 2007 Europe Buyout IK VII No.2 Limited Partnership 2012 Europe Buyout KKR Asian Fund II TE Blocker L.P Asia Buyout KKR 2006 Fund L.P U.S. Buyout KKR North America Fund XI L.P U.S. Buyout Littlejohn Fund V, L.P U.S. Buyout MatlinPatterson Global Opportunities Partners 2007 U.S. Buyout III L.P. 22 Onex Partners IV LP 2014 U.S. Buyout PAG Asia I LP 2011 Asia Buyout Permira V L.P Europe Buyout Silver Lake Partners III, L.P U.S. Buyout Silver Lake Partners IV, L.P U.S. Buyout Tailwind Capital Partners (Cayman), L.P U.S. Buyout TPG Partners IV, L.P U.S. Buyout TPG Partners V, L.P U.S. Buyout TPG Partners VI, L.P U.S. Buyout Vista Equity Partners Fund V-A, L.P U.S. Buyout FountainVest China Growth Fund, L.P Asia Growth equity Raine Partners I LP 2010 U.S. Growth equity Trustbridge Partners II, L.P Asia Growth equity Warburg Pincus Private Equity XI-B, L.P U.S. Growth equity Offshore Mezzanine Partners II, L.P U.S. Private debt Total - Astrea IV Portfolio , , , Source: Transaction documents, Fitch Ratings. As of 31 March

6 Approximately 52% of Astrea IV s NAV falls in the top two performance quartiles based on data from Preqin Ltd and Azalea. Six funds, consisting of approximately 16% of the portfolio s NAV, are in the bottom quartile of returns, which was reflected in Fitch s projections of performance. Fitch believes the Astrea IV portfolio is well diversified across a range of holdings. The underlying company investments are spread across 596 companies. The largest holding accounts for approximately 2.6% of NAV. In addition to the diversification characteristics mentioned above, the funds are mature with low unfunded capital commitments, a weighted average vintage of 2011 and a weighted average investee company investment holding period of approximately 4.3 years, as shown below. Portfolio NAV by Fund Strategy Portfolio NAV by Geography Private debt Growth equity 2% 12% Europe 19% Asia 18% Buyout 86% Source: Transaction documents. As of 31 March 2018 U.S. 63% Source: Transaction documents. As of 31 March 2018 Underlying Investment Sector Breakdown Software and services 17.4 Healthcare equipment and services 6.8 Energy 6.7 Diversified financials 6.4 Consumer durables and apparel 6.1 Retailing 5.3 Technology hardware and equipment 5.2 Materials 4.8 Capital goods 4.3 Commercial and professional services 4.2 Consumer services 4.1 Media 3.9 Pharmaceuticals, biotechnology and life sciences 3.9 Food, beverage and tobacco 3.6 Transportation 3.4 Banks 2.5 Real estate 2.5 Telecommunication services 2.0 Automobiles and components 1.9 Utilities 1.7 Insurance 1.3 Food and staples retailing 1.0 Household and personal products 0.7 Semiconductors and semiconductor equipment 0.3 Source: Transaction documents. As of 31 December 2017 (%) 6

7 Portfolio NAV by Vintage Year (% NAV) (%) & before Source: Transaction documents. As of 31 March 2018 Portfolio NAV by Investment Holding Period (% of NAV) (%) Yrs 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs 7 Yrs 8 Yrs > 8 Yrs Source: Transaction documents. As of 31 March 2018 Fund Quartile % of NAV 4th 16% 1st 21% 3rd 32% 2nd 31% Source: Preqin. Structural Protections and Security Given the uncertain nature of private equity fund distributions and the reliance on market valuations, the transaction includes structural protections to allow the rated bonds to weather negative market cycles and depressed valuations when private equity distributions may be low. The Class A-1 and Class A-2 bonds both have a scheduled call date of five years, but these bonds as well as the Class B bonds have long legal maturities of 10 years, which should be sufficient to weather a market downturn. Fitch s ratings address the timely repayment of the bonds at their legal final maturities, rather than repayment at the earlier scheduled call dates. The Reserves Accounts for repayment of class A bonds will retain cash distributions for the repayment of the Class A bonds until the scheduled call date or the Class A Reserve Accounts Cap is met. The structure also has a Capital Call Facility sized to the amount of unfunded commitments to the underlying funds and a Liquidity Facility to cover operating expenses and interest on the bonds. These features help mitigate the cyclicality of private equity funds that Fitch considered in its analysis. 7

8 Reserve Account The USD180 million (US dollar equivalent of SGD242 million) principal amount of the Class A-1 bonds and the USD210 million Class A-2 bonds are to be reserved on a straight-line basis over their expected call dates and funded as provided in the Priority of Payments. Payments to the reserve account will be made on semi-annual Distribution Dates to provide sufficient funds to fully repay both the Class A-1 bonds and the Class A-2 bonds at year five, as per the table below. Additionally, Clause 14 of the Priority of Payments allows for additional payments to the Reserves Accounts when the performance threshold is met. Reserve Account Distribution date A-1 reserve amount (USDm) A-2 reserve amount (USDm) Total reserve amount (USDm) December June December June December June December June December June Total (USD) Source: Transaction documents If available cash on any Distribution Date is insufficient to satisfy the Reserve Amount, the unpaid balance carries forward to subsequent Distribution Dates until paid through the Priority of Payments. Amounts transferred to the Reserve Account are capped (the Reserves Accounts Caps) at USD390 million, which is the combined principal amount of the Class A-1 and A-2 bonds. If, at end-of-year (EOY) five on the Scheduled Call Date of the Class A-1 and Class A-2 bonds, the total balance of the Reserves Accounts and Reserves Custody Account is at least equal to the principal of the Class A-1 bonds and there is no balance drawn on the Liquidity Facility then the Class A-1 bonds will be fully redeemed. If the total balance is equal to the aggregate principal of the Class A-1 bonds and Class A-2 bonds and no balance is drawn on the Liquidity Facility then the Class A-2 bonds will also be redeemed. Scheduled Call Date Scenarios Class A-1 bonds Class A-2 bonds Balance of Reserves Account at the Scheduled Call Date status status Less than the principal amount of the Class A-1 bonds Not redeemed Not redeemed Greater than or equal to the principal of the Class A-1 bonds but less Redeemed Not redeemed than the aggregate principal amount of the Class A-1 and A-2 bonds Greater than or equal to the aggregate principal amount of the Class Redeemed Redeemed A-1 and A-2 bonds Source: Transaction documents. Assumes there is no balance drawn on the liquidity facility The issuer may not partially redeem either the Class A-1 or Class A-2 bonds. If the Reserves Accounts were partially funded at or following the Scheduled Call Date additional funds would be diverted to the Reserves Accounts in accordance with Clause 8(ii) at each distribution date. If the balance of the Reserves Accounts is sufficient to redeem the Class A-1 bonds and/or Class A-2 bonds as described above at a subsequent distribution date, the specific class of bonds would be redeemed in full at that distribution date. In a default scenario, the Class A-1 and Class A-2 bonds have equal claim on monies in the Reserves Accounts. Outside of a default scenario, under expected case scenarios the Class A- 1 and Class A-2 bonds are likely to be called and paid off at the same time, but under more stressful conditions the Class A-1 bonds may be called and paid off before the Class A-2 8

9 bonds. Fitch believes these dynamics support assigning the same rating to the Class A-1 and Class A-2 bonds, and not differentiating between the ratings. Liquidity Facility The Liquidity Facility is a senior standby multi-currency liquidity facility established with DBS Bank Ltd. (DBS), ( AA- / F1+ ) to fund the issuer s and AOCs taxes, administrative expenses, management fees, hedging-related payments and interest payments on the Class A-1, Class A-2 and Class B bonds in the event of a cash flow shortfall. The Liquidity Facility fully matures upon the earlier of EOY 10 or the date on which all classes of bonds are fully redeemed (Termination Date). The facility steps down in accordance with the table below: Liquidity Facility Step-down provision Amount (USDm) Years 1-3 of the transaction Years 4-5 of the transaction 80.0 Year 6 of the transaction through the Termination Date 15.0 Source: Transaction documents Interest on the amount drawn is paid at a rate of the relevant London Interbank Offering Rate (LIBOR) plus 2.0%. There is an annual 70 basis point (bp) commitment fee on the undrawn portion. Per clause 4 of the Priority of Payments in Appendix A, any cash in the Operating Account on any Distribution Date will be used to pay the Liquidity Facility, up to the lesser of the outstanding loan balance or the full amount of cash in the Operating Account. Any loan amount outstanding after this payment is repayable on the next Distribution Date if there is sufficient cash in the Operating Account. In any event, the full amount of the loan balance must be repaid by the Termination Date. DBS can cancel the commitment or declare the outstanding amount due and payable if there is an event of default under the Liquidity Facility agreement. Such events include non-payment of loan principal or interest when due, insolvency or non-payment of any debt of the issuer and any event of default under the bonds. The liquidity facility provider will be replaced if the liquidity provider s rating falls below the lower of BBB+ and F2 or the then prevailing rating of the most senior class of bonds (Liquidity Facility Provider Minimum Rating Requirement), provided the replacement would not cause a downgrade to the then prevailing rating of the most senior class of bonds. The documents provide that the issuer and lender make commercially reasonable efforts to effect the replacement within 30 days. Fitch s Structured Finance and Covered Bonds Counterparty Rating Criteria serves as the operative criteria report for analysing Astrea IV s counterparties. The criteria states that a direct support counterparty, such as a liquidity provider, would be expected to have a long-term rating of BBB or a minimum short-term Issuer Default Rating of F2, without the need to post collateral, to support structured finance note ratings at the level of A, which is the expected rating on the Class A-1 and Class A-2 bonds. If in the future, the Liquidity Facility provider is downgraded below these levels and is not replaced, and the Liquidity Facility is determined at that time to be material to the ratings, the rating of the senior-most bonds outstanding at that time could potentially be capped at the then current rating of the Liquidity Facility provider. Capital Call Facility The Capital Call Facility is a standby multi-currency liquidity facility established with DBS (AA-/F1+), to fund any capital calls that are in excess of the available cash in the Operating Accounts (Shortfall Amounts) and for payments under Clause 11(ii) and Clause 11(iii) of the Priority of Payments. The Capital Call Facility fully matures upon the earlier of EOY 10 or the 9

10 date on which all classes of bonds are fully redeemed (Termination Date). The facility will initially be sized to the amount of the aggregate of all Undrawn Capital Commitments of the issuer as of the most recent month end. The facility will step down on a monthly basis starting after the Issue Date. The step down will resize the facility to the sum of the aggregate of all Undrawn Capital Commitments as of each date and the total loan outstanding on the Capital Call Facility as of each date. Interest on the amount drawn is paid at a rate of the relevant London Interbank Offering Rate (LIBOR) plus 2.25%. There is an annual 70bp commitment fee on the undrawn portion. Per Clauses 11(ii) 11(iv) of the Priority of Payments in Appendix A, any funds remaining after Clauses 1 11(i) of the Priority of Payments will be used to pay commitment fees, interest expenses and any other payables, and principal repayment on the Capital Call Facility. Any loan amount outstanding after this payment is repayable on the next Distribution Date if there is sufficient cash in the Operating Account. In any event, the full amount of the loan balance must be repaid by the Termination Date. DBS can cancel the commitment or declare the outstanding amount due and payable if there is an event of default under the Capital Call Facility agreement. Such events include non-payment of loan principal or interest when due, insolvency or non-payment of any debt of the issuer and any event of default under the bonds. The Capital Call Facility provider will be replaced if the provider s rating falls below the lower of BBB+ and F2 or the then prevailing rating of the most senior class of bonds (Capital Call Facility Minimum Rating Requirement), provided the replacement would not cause a downgrade to the then prevailing rating of the most senior class of bonds. The documents provide that the issuer and lender make commercially reasonable efforts to effect the replacement within 30 days. Fitch s Structured Finance and Covered Bonds Counterparty Rating Criteria serves as the operative criteria report for this ratings analysis. The criteria states that a direct support counterparty bank would be expected to have a long-term rating of BBB or a minimum shortterm Issuer Default Rating of F2, without the need to post collateral, to support structured finance note ratings at the level of A, which is the rating on the Class A-1 and Class A-2 bonds. If in the future, the Capital Call Facility provider is downgraded below these levels and is not replaced, and the Capital Call Facility is determined at that time to be material to the ratings, the rating of the senior-most bonds outstanding at that time could potentially be capped at the then current rating of the Capital Call Facility provider. Maximum LTV Ratio The Priority of Payments provides for the deleveraging of the issuer on any Distribution Date at which LTV exceeds 50% (Maximum LTV Ratio). The purpose of this feature is to deleverage the structure to protect bondholders from the risk of portfolio valuation declines or the risk of cash flow exiting the structure too quickly and rendering the portfolio too small to provide sufficient distributions to support the bonds. LTV is calculated as the outstanding balance of the Liquidity Facility, Capital Call Facility, and the bonds (net of the Class A-1 and Class A-2 Reserves Accounts balance and any principal repayments on the Class B bonds) divided by the total portfolio NAV. If LTV exceeds the Maximum LTV Ratio, 100% of cash flow remaining after payment of amounts due under clauses 1 through 9 of the Priority of Payments in Appendix A will be paid to the Reserves Accounts in accordance with Clause 10. If the Class A-1 and Class A-2 Reserves Accounts Cap has been met, the cash flows will be applied to principal repayment of the Class B bonds until the Maximum LTV Ratio is no longer exceeded. Payments to the Reserves Accounts under the Maximum LTV Ratio are subject to the Reserves Accounts Caps. 10

11 Hedging Full principal on the Class A-1 bonds and semi-annual interest is payable in Singapore dollars, unlike the other bond classes, which are payable in US dollars. The fund investments are denominated in US dollars and euros, creating a currency mismatch between Astrea IV s assets and liabilities. The issuer will employ hedge agreements to mitigate the risk that volatility in foreign exchange rates may negatively affect the cash flows needed to fund the required payments under the bonds. Fitch notes clause 13 of the priority of payments is a flip clause, which places any termination payments due to a hedge counterparty that is in default in a junior position in the transaction s priority of payments. The purpose of this provision is to mitigate the potential impact caused by the default or non-performance of the counterparty. In case the issuer does not pay a hedge counterparty, the transaction documents include a non-petition clause that prevents the counterparty from causing the issuer to file for bankruptcy. Class A-1 Bonds - Principal Amounts To mitigate the Class A-1 bonds foreign currency (FX) mismatch risk, at closing the issuer will enter into a five-year forward contract to buy Singapore dollars and sell US dollars to hedge 100% of the principal amount of the Class A-1 bonds at their scheduled call date with either hedge counterparty DBS ( AA- / F1+ ) or The Hongkong and Shanghai Banking Corporation Limited ( AA- / F1+ ), with whom the issuer has set up separate International Swaps and Derivatives Association Master Agreements. If, at EOY five, the Reserves Account is funded with at least USD180 million, the issuer will settle the forward and take delivery of SGD242 million to fully repay the Class A-1 bonds. If, at EOY five, the Reserves Account is funded with less than USD180 million, the issuer will settle the forward for the amount of US dollars that has been accumulated. For the underfunded US dollar amount, the issuer has the discretion to roll-over the hedge by entering into a six-month FX forward transaction with the counterparty. The forward transaction will result in cash flows to the issuer based on the difference between the initial forward transaction versus the spot rate of the new forward. There would be a net cash inflow if the US dollar has depreciated and a net cash outflow if the US dollar has appreciated since closing. At the discretion of the issuer, if at year 5.5 the Reserves Accounts are still not fully funded, the roll-over process would be repeated with another six-month FX forward for the underfunded USD amount. The FX forward would expire at the next Distribution Date and at the issuer s discretion, the process would repeat until Class A-1 bonds are fully repaid. If the Reserves Account is funded with less than USD180 million at EOY five, the issuer will be required to make a payment to the counterparty to settle the hedge if the US dollar appreciated against the Singapore dollar compared to the forward rate. However, this situation is unlikely because even under the adverse scenarios Fitch modeled, Fitch s analysis indicates there will be sufficient funds in the Reserve Account to fully settle the hedge for the Class A-1 bonds. Class A-1 Bonds - Interest Amounts At closing, the issuer will enter into ten separate forward contracts in amounts to fully match the ten semi-annual interest payments on the Class A-1 bonds with either of the hedge counterparties. If the Reserves Accounts are underfunded at the scheduled call date of the Class A-1 bonds, the issuer may enter into a six-month forward contract for the interest payment due at year 5.5. If at year 5.5 the Reserves Accounts are still not fully funded, it will be at the discretion of the issuer to enter into a new six-month forward contract for the interest payment due at the next Distribution Date and, at the issuer s discretion, continue the process until the Class A-1 bonds are fully repaid. 11

12 Euro NAV Hedge FX risk in the portfolio is manageable, as the bulk of fund investments provide distributions in US dollars. Of the 36 funds in the portfolio, six funds, totaling about USD181 million of NAV (16% of total NAV), call capital and make distributions in euros. To mitigate FX risk posed by the euro-denominated funds (compared to the US dollar and Singapore dollar denominated bonds), at closing the issuer will enter into a series of fixed forward contracts (with fixed forward rates and fixed forward dates) with either of the hedge counterparties, ranging in tenor from six months to five years, to hedge approximately 50% of the initial euro NAV, subject to change before closing. The tenors and notional amounts of euro hedges are set to match the projected euro NAV distributions and are subject to change until closing. As the timing and amounts of distributions from private equity funds are uncertain, fully hedging the FX exposure is impossible. Not hedging at all would leave Astrea IV vulnerable to significant FX exposure, but attempting to hedge 100% of NAV could still leave the structure over-hedged and exposed to FX risk if distributions come in lower than projected and the FX moves against the structure when it needs to settle the forwards. Hedging a sufficient portion of the NAV, and providing the manager flexibility to hedge further over time if deemed necessary is a prudent approach in Fitch s opinion. Any underperformance in the euro-denominated funds would create an additional foreign exchange risk, as the structure is required to deliver euros for each foreign exchange hedge as they become due. As discussed later in this report in Euro Hedge Stresses, Fitch conducted stress scenarios to model the sensitivity of the structure to underperformance in European funds and to adverse moves in USD/EUR exchange rates and the rated bonds passed at their assigned rating levels. Hedge Counterparties Hedge counterparties will be DBS and The Hongkong and Shanghai Banking Corporation Limited. The hedge counterparty will be replaced if the counterparty s rating falls below the lower of BBB+ and F2 or the then prevailing rating of the most senior class of bonds (Hedge Counterparty Minimum Rating Requirement), provided the replacement would not cause a downgrade to the then prevailing rating of the most senior class of bonds. The documents provide that the issuer and lender make commercially reasonable efforts to effect the replacement within 30 days. Although Fitch currently rates the hedge counterparties well above the minimum direct support criteria guidelines, if a downgrade below these levels were to occur and the replacement of the counterparty materially extends beyond the 30-day window, Fitch would review the circumstances at that time to determine if a rating action, which could potentially include capping the rating of the senior-most bonds then outstanding at the then current rating of the downgraded hedge counterparty, would be warranted. Euro NAV Hedge No. Forward tenor Euro hedge amount (EURm) year year year year year year year year year year 1 Note: Notional amounts are subject to change until closing Source: Transaction documents 12

13 Disposal Option Astrea IV has the ability to sell stakes in the underlying private equity fund interests at the manager s discretion ( Disposal Option ), with certain restrictions. The manager may exercise the Disposal Option multiple times; however the aggregate NAV of underlying funds that can be sold prior to the full redemption of all bonds may not be greater than 10% of the aggregate initial NAV. Proceeds from the sale or disposal of any underlying fund interests will be received in the Collection Accounts and then swept into the Operating Accounts. At each Distribution Date, if net cash proceeds have been received from exercising the Disposal Option, any cash proceeds from the Disposal Option remaining after Clauses 1 6 of the waterfall will be applied in accordance with Clause 7. Clause 7 dictates that any proceeds from the Disposal Option will be applied to the Reserves Accounts of the Class A-1 and Class A-2 bonds. If the bonds are fully reserved, the Disposal Option proceeds will be applied to principal repayment of the Class B bonds. Fitch views the disposal option as a positive, as it may allow the manager to realize some of the outstanding NAV if organic distributions from that NAV come in lower or slower than needed to pay Astrea IV s liabilities. Cash Flow Scenario Analysis As described in the criteria Rating Closed-End Funds and Market Value Structures, in rating PE CFOs, Fitch reviews the structure s projected performance and distributions over different market cycles to assess whether cash flows are sufficient to pay off the rated obligations based on the transaction s structural features. The performance scenarios for Astrea IV were constructed based on historical data that matched some specific characteristics of Astrea IV s portfolio, primarily the types of funds (buyout, growth equity, or credit) and the age of the funds. For example, about 20% of Astrea IV s portfolio comprises 2013 private equity buyout funds, which are approximately five-year old funds as of the expected launch of Astrea IV in As a result, Fitch reviewed how five-year old buyout funds performed over different economic cycles. These scenarios correspond to previous economic cycles observed over 10-year intervals, to match the legal final maturity of the Astrea IV rated bonds. For example, in one scenario we have reviewed how a portfolio similar to Astrea IV s current profile would have performed during the 10-year period between 2000 and 2010, which in the charts below we refer to as the start-year 2000 scenario (labelled 2000 ). The key data points in the analysis are (1) how much capital the underlying funds called, (2) how much capital the underlying funds distributed and (3) what was the NAV appreciation or depreciation that was driving distributions. In addition, Fitch stressed the resilience of the structure to potential underperformance in Astrea IV s underlying funds. While Astrea IV s portfolio comprises funds of a relatively even mix of performance as measured by quartiles assigned by third-party data providers, in some of the scenarios Fitch ran, all of the funds performance was assumed to have deteriorated to 3rd quartile or 4th quartile levels, which negatively affected their projected distributions and other performance measures. In measuring the results of the scenarios, Fitch focused on certain metrics, primarily the ability to make timely interest and principal payment with respect to the legal final maturities of the rated bonds, as well as total cash flow coverage of the rated bonds, total cash flow as a percentage of the transaction NAV, cash flow coverage of fees and expenses, and how various structural protections drove performance of the transaction (LTV triggers, reserve account, Liquidity and Capital Call Facilities and so on). Results The Asf rating of the Class A-1 and Class A-2 bonds is supported by the fact that under all fourth quartile performance projections Fitch ran the Class A-1 and Class A-2 bonds made all timely interest and principal payments with respect to their legal final maturity of 10 years. In all cases, the Class A-1 bonds were called on the scheduled call date (fifth year) with the ratios of distributed cash coverage to the Class A-1 principal amount varying between 1.9x and 2.9x in 13

14 the different scenarios. The Class A-2 bonds were called by the scheduled call date in 11 out of 17 scenarios and distribution coverage ratios varied between 1.3x and 2.0x. The Class A-2 bonds were called in year six under the most punitive scenario. The BBBsf rating of the B bonds is supported by the fact that under all third quartile performance projections Fitch ran the B bonds made all timely interest and principal payments with respect to the legal maturity of the B bonds of 10 years. The principal payback period for the Class B bonds varied between five and seven years. Cash flow coverage varied between 1.8x and 2.5x for the B bonds. Generally, the more negative scenarios for the B bonds are those where the 10-year life of the deal starts with a strong market cycle, but turns negative midway. For example, in the start year 2003 scenario the portfolio is projected to generate very strong distributions in the first five years of the transaction, but then enters the 2008 financial crisis and generates much weaker performance for the next five years. In this scenario, while over the life of the deal total cash distributions are high, in the first five years the scheduled reserve payments are made for the Class A-1 and Class A-2 bonds, but much of the strong distributions flow out of the structure to the equity holders. Since the B bonds do not start being repaid until the Class A bonds are repaid, at the earliest in year five, the B bonds do not benefit from the portfolio s strong distributions in the first five years, but only start receiving cash sweeps in the weak years In very stressful scenarios, where the Class A-1 or Class A-2 bonds are called later than year five because the Reserves Accounts are not full, the B bonds will have even less time to be paid off via realized distributions. However, the disposal option discussed above is an additional positive qualitative factor to consider, which was not specifically modelled in the scenarios Fitch ran since it is at the discretion of the manager. By exercising the disposal option the manager may accelerate realization of the NAV on the secondary market, although likely at a steep discount in a stressed market. % NAV Distributed Per Launch Year Scenario Over Projected 10-Year Life of Astrea IV All quartile 2018 (LHS) 2019 (LHS) 2020 (LHS) 2021 (LHS) 2022 (LHS) 2023 (LHS) (% of NAV) 2024 (LHS) 2025 (LHS) 2026 (LHS) 2027 (LHS) Total (RHS) (%) Source: Fitch Ratings 14

15 Euro Hedge Stresses Given the portfolio s exposure to European funds that distribute NAV in euros, Fitch considered the impact of potential foreign exchange fluctuation on the structure. As outlined in Fitch s Rating Closed-End Funds and Market Value Structures Criteria, in a few of the most adverse scenarios, we ran some stresses where we fully discounted the portion of NAV from eurodenominated funds that was not hedged. These results were not materially different from the base case scenario due to the relatively small euro NAV exposure in the portfolio. For example, assuming fourth quartile performance, the Class A-1 Bonds were called on the scheduled call date in all scenarios with cash flow coverage ratios varying between 1.7x and 2.6x, compared to the base case of 1.9x and 2.9x. The Class A-2 Bonds were called in year seven in the most punitive scenario with cash flow coverage ratios varying between 1.2x and 1.8x, compared to the base case of 1.3x and 2.0x. Finally, assuming third quartile performance, the Class B Bonds were called in year 7.5 in the most punitive scenario with cash flow coverage ratios varying between 1.6x and 2.3x, compared to the base case of 1.8x and 2.5x. In addition to the stresses noted above, which we view as unlikely, for informational purposes we also ran some FX stress scenarios based on what we view as more reasonable stress assumptions for FX moves. In these assumptions about USD/EUR moves, Fitch considered the risk of adverse foreign exchange fluctuation along with the uncertainty in timing fund distributions, and their effect on the structure s ability to timely repay the bonds as outlined in Fitch s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance criteria. These stresses were applied to evaluate scenarios where the euro appreciates and depreciates against the US dollar, as the structure is required to deliver euros at the maturity of each hedge as described in the section above on hedging. The euro-denominated distributions were adjusted at each payment date in accordance with the scheduled hedge amount to evaluate the impact on the portfolio s total fund distributions under all quartile, third quartile and fourth quartile fund performance scenarios. Using fourth quartile fund performance projections, the worst performance was observed in the launch year of 2013 and the scenario where the euro depreciates against the US dollar. Under this scenario the Class A-1 bonds made all timely interest and principal payments with respect to their scheduled call date with cash flow coverage of 1.7x, compared to the no FX stress cash flow coverage of 1.9x. The payback period on the Class A-2 bonds was extended to year 7.5 and the cash flow coverage was 1.2x, compared to the no FX stress where the payback period was six years with cash flow coverage of 1.3x. Under the third quartile fund performance projections, the worst performance was observed in the launch year of 2004 and the scenario where the euro depreciates against the US dollar. The Class A-1 and Class A-2 bonds made all timely interest and principal payments with respect to their scheduled call date with cash flow coverage of 3.6x and 2.4x, respectively, compared to the no FX stress where cash flow coverage was 3.9x and 2.7x, respectively. The Class B bonds payback period was extended to year 7.5 and the cash flow coverage was 2.1x, compared to the no FX stress, where the payback period was seven years and the cash flow coverage was 2.3x. In all cases, the performance metrics were in line for each of the bonds expected rating levels. 15

16 Valuations Private equity fund valuations are made available quarterly on an unaudited basis and annually on an audited basis. GPs apply various valuation methods (discounted cash flow analysis, multiple analysis and so on) to the underlying holdings of the fund, usually incorporating the trailing 12 months financial performance of each asset. Valuations are made as of a certain date and are reported to the LPs a few months following the valuation reference date. Valuation methods can vary from fund to fund, as managers have discretion on the applied techniques. However, these valuations are generally prepared in accordance with International Financial Reporting Standards or generally accepted accounting principles in the US or elsewhere. The initial valuation of Astrea IV was based on the audited NAV of the funds as of 31 March 2018 which were based on the most recent available financial statements of the underlying interests at the time of audit. The NAV valuations for each fund were adjusted for any capital calls or distributions made between the time of valuation and 31 March 2018 and audited. A risk exists that a market downturn occurs between the valuation dates of each underlying fund and the launch of Astrea IV, which would adversely affect the LTV of the structure. Going forward, valuations will be made at each Distribution Reference Date based on the most recent audited or unaudited NAVs provided by the underlying GPs. These are reported by the GPs quarterly, typically with a day delay. The valuations will be based on the most recent valuations provided by each GP and adjusted for any distributions (subtracted from NAV) or capital calls (added to NAV) made between the reference date of the GP s valuation and the Distribution Reference Date of Astrea IV s bonds. Fitch reviewed a sample of both the audited valuations of the LP interest and the unaudited valuations of the underlying companies in the funds and has found them to be reasonable. When reviewing the valuations Fitch focused on the range of metrics applied to the underlying companies such as the discount rate applied for discounted cash flow analyses and the multiples applied for multiples based valuations. These figures were compared across funds and also to publicly valued companies. Fitch reviewed data outliers in both the valuations of the LP interests and the valuations of the underlying companies. These valuations were reviewed for reasonableness using available resources including financial statements, company websites, and investor letters. The valuation methodologies for the identified companies were determined to be reasonable. Ratings Sensitivity to Account Investments The funds in the Reserves Accounts may be placed in security instruments or bank deposits in accordance with the Eligible Investments and Eligible Deposits definitions contained in the Astrea IV Master Definitions and Interpretation Schedule (MDIS). The transaction documentation permits these investments to mature as late as the scheduled call date, which significantly exceeds the maturity levels contemplated in Fitch s counterparty criteria as it relates to eligible investments. Owing to the significant long-dated exposure bondholders may have to investment counterparties, the ratings of the Astrea IV bonds will be capped at the ratings of investments in the Reserves Accounts, or the ratings allowed for investments in the Reserves Accounts by the transaction documentation, whichever is lower. Therefore, if a security in the Reserves Accounts is downgraded in the future below the ratings of the Class A bonds, the ratings of the bonds may also be downgraded, based on the materiality of the exposure. The transaction documents specify that investments in securities require a rating of at least AA- by Fitch. Bank deposits are required to be invested with banks rated at least AA- by Fitch for amounts covering the Class A-1 bonds principal, while for amounts above the principal of the A-1 bonds the banks have to be rated at least A+ by Fitch. As noted above, the 16